Concerns under Company Law

An Indian Perspective on Special Purpose Acquisition Companies, GLA-TR-001

advisable to have an external and independent due diligence advisor who would play an important role in assistance of the information required on the target company. Further they would also provide an unadulterated perspective on the risks and opportunities and compliance of the target company with the anti-money laundering laws of the concerned jurisdiction of the target company and if regular adequate disclosures have been made.

Provided the information and already existing regulatory framework of the SPACs within several countries, firms involved in the SPAC process also must take necessary steps to understand and monitor the risks and the method of incorporating this in the development of the anti- money laundering tools. Essentially the beneficial ownership of the shares should be disclosed and be transparent. However, the existing problems with the SPAC shares are essentially held by the shareholders and hence the beneficial ownership lies with them. SPAC unit of share is composed of equity and warrants, and the equity might be reportable but the unit as a whole may be non-reportable. However, the information of beneficial ownership should be accurate and adequate. Round tripping is another common phenomenon that can take place especially in case of the De-SPAC procedure in case of any outbound merger of an Indian company where the target company within India is acquired through reverse merger or share swaps which would require a prior approval from the RBI and several compliance measures to be undertaken. This can sometimes cause round tripping of funds for some of the resident shareholders which is considered as illegal which can convert illegitimate funds into legally sourced assets or income for the SPAC which can raise several concerns.

Concerns under Company Law

Legislation and regulations governing company laws are not suitable for the establishment and functioning of SPACs in India. There are several aspects within the regulations which are not conducive for the development and functioning of SPACs. For instance, the government’s actions against shell companies for legitimate state aims has a direct consequence on growth and

development of SPACs in India. The Government has been wary of shell companies owing to concerns of tax evasion, avoidance and other economic related offences.44 Considering that a SPAC does not undertake business functions, it requires a delicate policy approach.

It is reported that SEBI has suggested defining a shell company as any entity having no significant operational assets and or business activity of its own but acting in a pass through capacity as a conduit.45 It would be a challenge for the policy makers and regulators to distinguish between an illegal shell company and a legitimate SPAC. Considering that any definition will be further subjected to judicial interpretation, the scope and ambit of defining an illegitimate shell company and a legitimate SPAC will require consideration.

At a fundamental level, the Companies Act, 2013 does not provide any provision for establishment or functioning of SPACs. Rather, some of the provisions in the Companies Act, 2013 creates an impediment for establishment and development of SPACs in India. Under Section 248 of the Act, the Registrar of Companies (RoC) has the power to remove the name of a company if a company fails to commence its business within one year of its incorporation. Considering that SPACs are given 36 months and require that time to identify a target company and further complete the business combination, the power of the RoC to strike off a company which fails to commence operations within one year is a major hurdle. Since the said provision does not provide any exception to exclude SPACs from its ambit, the

44 Gulzari MA, ‘Is Corporate India Ready to Board the Spac-Ship?’ (The CBCL Blog, 09 May 2021) <https://cbcl.nliu.ac.in/capital-markets-and-securitieslaw/is-corporate-india-ready-to-board-the-spac-ship/> accessed 27 September 2021. 45 Press Trust of India, ‘Govt, Regulators Mull Challenge-Proof Definition for Shell Companies’ (The Economic Times, 13 May 2018) <https://economictimes.indiatimes.com/news/economy/policy/govtregulators-mull-challenge-proof-definition-for-shellcompanies/articleshow/64145993.cms?from=mdr> accessed 27 September 2021.